Tea Industry Responds to Teavana Opportunity

Shuttering 379 Teavana retail locations presents a $275-million-a-year opportunity to finally discover retail success in tea.

The announcement that Starbucks will close its Teavana stores gives retailers an opportunity to capture the attention of the several million tea drinkers who frequented these mall locations. The closures also shed light on why the Teavana concept, which initially showed great promise, proved unsustainable. Here are some tea industry takes on the news.

Michael Cramer, Adagio Teas founder:

“The closure of Teavana stores marks the onset of the Cambrian period for tea retail,” writes Cramer. “The dinosaur that eclipsed the sun for many independent retailers is going extinct, creating an opening for the explosion of new retail concepts and business entrants. …

“The shuttering of Teavana stores says more about the consequences of hapless management, aggressive sales and poor customer service endemic to that company than it does about Americans’ affinity for tea or the health or prospects of its specialty tea industry. Howard Schultz is a smart man, but in this case, he erred in overspending on what most in the industry knew to be a lemon. Teavana Lemonade is his only consolation.”

Brian Keating, founder of Sage Group consulting in Seattle:

“There is no indication whatsoever that Teavana’s many challenges included a slowing or leveling interest in specialty tea by American consumers,” writes Keatin, a veteran tea analyst.

Charlie Cain, a principal and executive consulting with Building Oz:

Cain, who was Teavana’s vice president of concept development and franchising through January 2015, explains that “Teavana’s success was as a novelty gift shop in high-traffic, Class A shopping malls. New stores saw dramatic early sales results, but sustained sales growth beyond seasonal gifting required consumers to shift their tea purchasing from the local grocery store to the regional mall. That’s not a behavior we see happening consistently in any other specialty food or beverage industry.”

“I don’t believe this announcement signals weakness in the market for specialty tea,” Cain writes. “Eighty percent of Americans drink tea, and 50 percent do so daily. The specialty tea segment is growing at nearly twice the rate of the overall U.S. tea business, and demographic trends suggest the industry has a long runway of expansion as younger consumers are more inclined to favor tea over coffee than their parents.”

Cain specifically identified DAVIDsTEA and other brands that might have been blocked out of the best locations by Teavana’s non-compete clauses with landlords.

“The most profitable tea shops in America today are in Class  A shopping malls, and that seems unlikely to change anytime soon,” Cain said.

Austin Hodge, founder Seven Cups:

“In my view, the specialty tea market is in its infancy outside of China,” writes Hodge. “What we have seen so far has been a collection of industrial-produced teas that have been flavored, blended and hyped as specialty tea. A market countrywide has yet to develop for quality, authenticated tea made by small, skilled tea makers.”

Bill Waddington, founder of TeaSource:

“Boy, that was a waste of $620 million by Howard (Schultz),” writes Bill Waddington, founder of TeaSource, a wholesale and retail venture in Minneapolis-St. Paul. “I agree that malls are seriously in trouble, long term.  But I think it is a big mistake to abandon brick-and-mortar in its entirety (which seems to be what Starbucks is doing).

“There needs to be a reimagining of the ‘retail experience’ of how tea in brick and mortar should look and feel. That is exactly what TeaSource is doing right now.”

Next Steps for Teavana

Closures begin in Canada where Starbucks operates 56 locations. The first stores will close by the end of September. The remaining American locations will close next spring. The decision follows the biggest stock decline at Starbucks in two years, announced last week during an earnings call in which the company lowered its profit forecast.

In April Starbucks announced it would “evaluate strategic options” for Teavana. Last week Starbucks Chief Financial Officer Scott Maw told investors “that many mall-based retailers have been adversely impacted by reduced foot traffic, resulting from the accelerating shift of consumer behavior away from brick-and-mortar retail and changes in consumer retail activity overall.”

During the earnings call company executives said that during the past year they tried remodeling stores, introducing new tea drinks, improving training, updating merchandise and spending more on promotion. Online sales are fine but the rate of decline at mall-based stores is “worse than forecast with many Teavana mall stores reporting negative comps and operating losses for some time,” said Maw. The company expected further decline, he said.

Starbucks is not giving up on Teavana-branded products. The company paid $620 million for Teavana in 2012 and has booked a return-on-investment from the billion-dollar brand but not in tea retail. Teavana offerings significantly improve same-store sales growth in Starbucks cafes, especially in summer.

“Leveraging Teavana’s brand to drive sales in Starbucks has been a tremendous success,” writes Cain. “Tea has consistently been among the fastest growing categories within Starbucks stores in the four-and-a-half years since the acquisition.”

Teavana is expected to generate $1.6 billion in 2017, according to the company. Sales of tea in coffee shops generates approximately four times greater revenue than mall locations. Sales are also promising from a new line of glass-bottled Teavana read-to-drink (RTD) tea sold in convenience and grocery in five states since February. RTD earns the largest portion of tea retail dollars in the U.S.

Despite its presence in every major U.S. market, Canada and Mexico “there is little indication the soon-to-be-defunct retailer did much to raise consumer interest in tea,” writes Keating.